The Surprising Cost of Working Freelance

Working freelance is an appealing idea if you're unemployed or unhappy with your job. You can be your own boss, do what you love and set your own hours.

But before you give two weeks' notice or stop your job search, be aware that freelancers have a variety of expenses that employees don't.

"I think that sometimes people get so caught up in the excitement of being their own boss that they forget these kinds of things," says Lisa Kanarek, founder of WorkingNaked.com, a website that gives advice to home-based business owners; Kanarek is also the author of the book "Working Naked."

You'll need to make more than you did in your salaried position to cover these new freelance expenses and have the same level of financial stability, according to Michelle Goodman, author of "My So-Called Freelance Life."

Following are some freelance expenses you'll need to account for and tips on how to manage them.

As your own boss, you'll have to buy your own office supplies. And if your computer breaks down, you have to pay to replace it or to get it fixed.

Still, when you work freelance, some of your other costs go down. For instance, you don't have to spend as much money on work clothes, dry cleaning and child care because you're working from home. These differences may help to mitigate your freelance expenses.

With a sluggish economy, Kanarek advises people not to start a full-time freelance business. She suggests first trying it part-time to ensure it's something you'll like.

Kanarek says if you can't make enough money as a freelancer, you should probably make it a sideline.

If you're an employee, your company pays half of the tax for Social Security and Medicare. But as a freelancer, you pay the whole thing.

Fortunately, you can offset that new expense with all of the tax deductions you're now eligible for as a self-employed person, Goodman says. For example, you can deduct the cost of your home office, office supplies and insurance premiums.

However, all of these deductions make doing your taxes more complicated. That's why Goodman and Kanarek recommend that you hire a professional to do your taxes.

"I wouldn't even try to do it myself. I would miss deductions," Kanarek says.

Goodman says the best way to find a tax preparer is to ask freelancers you trust to recommend one. You want to make sure it's someone who's had experience preparing tax forms for freelancers. If you don't know others working freelance, you can find them on websites such as FreelancersUnion.org.

Pay for Your Own Health Insurance

Doing what you love seems to come with a hefty health insurance price tag. As a freelancer, you have to pay your entire health insurance premium. So when you shop for health insurance, you may need to look for a plan with a high deductible to save money, Goodman says.

She recommends hooking up with an insurance broker who works with multiple insurance carriers to find the best plan. "They can help you pick out something that's more catered to your needs," she says.

You also should look into creating a health savings account, or a savings account not taxed at the time of deposit. An HSA rolls over at the end of the year, so you won't run the risk of losing your money, Goodman says.

Tax deductions help mitigate the cost of health insurance. In September, President Barack Obama signed the Small Business Jobs Act, which allows freelancers and small business owners to deduct the cost of their health insurance before computing their self-employment taxes.

Insure Your Home Office

Besides buying your own health insurance, you also will need to insure your home office.

Kanarek advises against shelling out money for a well-appointed home office when you're working freelance. If you don't meet with clients at your office, you don't need the trappings of a cushy office.

"Focus on equipment. Put your money there," she says. The necessities are a good printer, a fast computer and a reliable Internet connection.

Goodman says if you have clients or subcontractors visit you at home, you'll want to purchase business liability insurance, sometimes called trip-and-fall coverage.

She says business insurance can be costly. To find a reliable agent or carrier, get recommendations from other freelancers so you're not oversold on the coverage.

Becoming a Business

For her freelance business, Kanarek created a limited liability company, or LLC, to ensure she had personal liability protection.

With an LLC, owners have limited personal liability for the debts and actions of the company. It can protect your car and house should you get sued. It can cost $500 to $1,000, but it's worth it, Kanarek says.

She recommends having an attorney create your LLC. "Anything having to do with the law or money, you want to do it professionally," she says.

Getting Contracts Written

Before signing a contract, Kanarek gets professional legal help to ensure that her freelance contracts protect her and her clients.

If you want to save money on legal advice, Goodman recommends using legal clinics at law schools. They're reasonably priced and sometimes free, she says. You're only allowed to make use of these services four times per year.

But you should hire a lawyer who works with freelancers regularly to look over uniform contracts you'll be using regularly, says

Cut Back on Professional Conferences

Freelancers aren't given company expense accounts or credit cards to fund their trips to professional conferences. If they want to keep going to conferences, they're going to have to pay for it.

"I really think twice about going to a conference (because of the cost)," Kanarek says. "Plus, it's going to take me away from my business."

But Kanarek still finds conferences helpful. "It's nice to connect with people and get other ideas," she says.

She has cut back on conferences since her time in the corporate world. That's why she does webinars and listens to recordings of webinars when she can't listen live.

A great way to save on travel and registration fees is to volunteer at the conferences or offer to serve on a panel, says Goodman. The conference host might pay for your hotel or travel, or both.